Question

In: Statistics and Probability

An insurance company sells a $16,000, eight-year term life insurance policy to an individual for $1,620....

An insurance company sells a $16,000, eight-year term life insurance policy to an individual for $1,620. Find the expected return for the company if the probability the individual will live for the next eight years is 0.93. (Round your answer to the nearest cent.)

Solutions

Expert Solution

Given,

Probability of living=0.93

Probability of death=1-0.93=0.07

Cost of policy=$1,620

If the person dies, company has to pay $16,000.

Overall loss for the company=16000-1620=$14380

If the person lives, company does not to have to pay anything, instead it gets to keep $1,620

Expected value,

Let x be the return for the company

Return for the company, x 1620 -14380
Probability, P(x) 0.93 0.07

Expected return for the company=$500


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